Saturday, March 7, 2009

only to have to take the full measures a few years down the road when in even greater debt.

From Alphaville:

A deceitful deal for Lloyds Banking Group

It’s a deceit on British taxpayers, not Lloyds shareholders, who are getting a free and gloriously pimped ride.

Lloyds formally released details of the terms of its participation in the government’s Asset Protection Scheme on Saturday, along with information on a further strengthening of its capital base. The three key moves are:

- a bolstering of its core Tier 1 capital by the conversion of the government’s £5bn holding of preference shares into ordinary stock at 38.43p per shares;

- the issue, to the government, of £15.6bn worth of convertible stock called “B shares” that are offered at 42p-a-share and convert into ordinaries at 120p-a-share; and

- the purchase of $15.6bn worth of toxic asset protection.

There are claw-back arrangements for existing holders, but we won’t worry about those for now.

The converted £4bn of prefs, we are told, take the government’s shareholding from 43.5 per cent to 65 per cent. The new convertible B shares do not carry votes (although there is a 7 per cent minimum coupon) and the Lloyds statement declares the following:

In addition, in the event of full conversion of the B Shares, if HM Treasury retained all the ordinary shares resulting from such conversion and assuming it still retained all its existing shareholding in Lloyds Banking Group plc, then HM Treasury’s aggregate ordinary shareholding would be 77 per cent.

This looks like voodoo mathematics.

Lloyds has a little over 16.3bn shares in issue, which as of Friday gave the bank a market capitalisation of about £6.85bn. Since the conversion of the existing prefs does not amount to new money (just the assumption of more risk for taxpayers), it would be misleading for us to extrapolate directly from the stated fact that £4bn of equity at 38p or so is worth a further 26.5 per cent of the bank – taking the government’s holding to 65 per cent.

But £15.6bn in brand new “B share” money is another matter entirely. Pretending that the “see thru” economic interest of this convertible stock is worth just 12 per cent of the whole entity is plainly heroic. Especially when you consider this, from the appendix to Saturday’s announcement:

For these purposes, on a winding-up, each holder of a B Share will be deemed to hold one ordinary share of the Company for every B Share held at the date of the commencement of such winding-up (the “Winding Up Ratio”).

Actually, it’s anti-heroic in that it amounts to stamping all over the interests of British taxpayers – all in the name of retaining Lloyds’ status as a private entity listed on the London stock market.

Think about it - £15.6bn of new money required to pay for years of stupid lending decisions does not speak for 12 per cent of Lloyds Banking Group. It speaks pretty much for the whole stinking lot.

Why is the government doing this? Set aside for the moment all the tosh about it being important to keep banks in private hands and the danger of creating a nationalisation panic at other wobbly institutions. Think back instead to the events of last autumn, when the Tripartite Authorities, egged on by Victor Blank (cheque), convinced Eric Daniels that a speedy takeover of HBOS was both in the public interest and attractive to Lloyds, handing it a prospective monopoly position in British retail banking.

It is difficult to avoid the suspicion now that the government, to hide its own in adequacies, is conniving to keep these men in their jobs, while at the same time allowing existing shareholders to cling on to the fantastical idea that their stock is actually worth something.

For the record, when the head of media relations was contacted by telephone for comment, the reply was: “I’m sorry, but the person you wanted has a voice mail that has not been set up yet. Goodbye.”

If anyone in political opposition to the government wants to get up to speed on what is happening here we’d suggest reading this first – an account of testimony delivered to the US congress by Adam Posen of the Peterson Institute at the end of last month.

In elegant and convincing terms, Posen maps out how in a banking crisis like this one politicians, supervisors, regulators, bank management and shareholders are incentivised to hide the truth from themselves and from the public at large.

The Lloyds/HBOS debacle offers a perfect illustration of Posen’s thesis, which the Peterson man says has to be addressed by limited temporary nationalisation and wholesale replacement of both supervisors and bank executives.

Note his conclusion:

If those programs live up to their associated rhetoric, and are thus tough enough on the current shareholders and top management of our undercapitalized banks, we can in 2011 be like Japan in 2003, at the beginning of a long and much-needed economic recovery. If unneeded complexity of the bad-bank construct, excessive reliance on and generosity to private capital, and unjustified reluctance to temporarily nationalize some US banks turn the proposed bank clean-up programs into only half-measures, then we will be like Japan in 1998, squandering national wealth and leaving our economy in continuing decline, only to have to take the full measures a few years down the road when in even greater debt.

Related links:

Lloyds Banking Group APS statement

Lloyds in £260bn deal with government - FT

Adam Posen testimony


Don the libertarian Democrat Mar 7 19:55
I agree with Posen, but Vikram has a point. Just as in the US, there was no real plan to seize large insolvent banks. The plan was to merge large insolvent banks with large solvent banks. That was a costly and terrible plan, since their size led to their complexity and unconcern about risk. Vikram could even argue that the government owes Lloyds because they helped them to get involved.

But one way the government got involved, at least in the US, was to subsidize the deal. So there was an assumed positive side to the investment for the acquiring bank. The real question, going forward, is who is more important? The taxpayers or the banks and shareholders?

I've an easy answer to that, being a taxpayer only. I do see the other side of the problem, but it is simply too costly both economically and socially. Any plan is risky. We cannot escape that.

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